The Next Battle Over Apple

There are battle lines forming in the world of technology. It's a largely silent battle thus far, restricted to the behind-the-scenes world of "supply checks" and chatter across the Asian electronics manufacturing industry.

But it's about to heat up.

A vulnerability?
With the all-important holiday season coming up, expect today's skirmishes between Apple's (Nasdaq: AAPL  ) bulls and bears to turn into more ferocious salvos. Apple's latest quarter proved it's not invulnerable; for the first time since 2002, Cupertino missed earnings estimates that analysts had set for the company.

In recent weeks there have been plenty of reasons to brush off last quarter's miss. During the quarter, consumers were aware that a newer iPhone was coming and held off buying an iPhone 4, knowing something better was right around the corner. When the iPhone 4S came out and sold 4 million units in its first weekend, more than double the 1.7 million the iPhone 4 sold in its first weekend, Apple's sense of invulnerability returned.

However, doubts about Apple's future crept back in this week. On Wednesday, DigiTimes, the Taiwanese daily that regularly reports on chips news inside China and Taiwan's supply chain, cited anonymous sources claiming Apple is cutting back on orders from its suppliers. The analysts at DigiTimes surmised that this meant after an initially strong pre-order period, iPhone sales were slowing down more than expected.

Apple: A rumormonger's dream
After the DigiTimes report, a series of analysts and industry observers weighed in, leading to increasing pressure on Apple's stock that caused it to trail the market by a fairly sizeable amount in the latter half of the week. Reports like this can also weigh on Apple's vast army of suppliers, including Cirrus Logic (Nasdaq: CRUS  ) , OmniVision (Nasdaq: OVTI  ) , and TriQuint (Nasdaq: TQNT  ) , as investors try to get ahead of the news and sell off companies that could be negatively affected by Apple's order scale-back.

And the DigiTimes reports didn't stop at Apple's order slowdown. On Thursday, the daily also issued a report that Amazon.com's (Nasdaq: AMZN  ) Kindle Fire tablet continues to sell strongly and that the company is increasing its production to 5 million for 2011, up from its previous order of 4 million. With researcher ChangeWave also reporting in the week that 26% of Kindle Fire buyers are delaying or putting off purchasing an iPad, its success threatens to shatter Apple's near-monopoly in the tablet space.

Don't buy the rumor
The bottom line in all this: Should investors care?

The short answer is "no." DigiTimes has a pretty large army of unnamed sources across Asian suppliers, but information is often conflicting and its reports aren't always correct. Further, even if Apple is delaying orders, the DigiTimes analysis that Apple's order cutback equals slowing demand might be incorrect. Apple could be cutting back because of supply issues resulting from the Thai floods that have devastated large part of the chip industry. Or Apple could simply be adjusting the excess inventory of components it keeps.

Perhaps most importantly, the reports don't jibe with the continuing successful rollouts of the iPhone 4S around the world. This week, the iPhone 4S sold out in three hours when it hit Hong Kong, as gangs attempted to bully their way to the front of lines, resulting in police intervention.

A credible threat
The Kindle Fire news is a bit more intriguing. There's little doubt that the tablet continues to sell well, and with good cause. Its $199 price point makes it priced to move, and Amazon's tie-in media offerings and marketing should also contribute heavily to its success.

But what's the threat to Apple? If Amazon does produce 5 million Kindle Fires in 2011 and moves most of the inventory, that might mean up to a million lost iPad sales. That's a big number; resulting in about $600 million in lost revenue during the quarter. However, with Apple poised to see at least $37 billion in revenue during that period, such a shortfall would be less than 2% of its total sales.

Not to belittle Amazon's threat. However, I also think it would have been naive to imagine that any challengers would never surface in the tablet market. Whether it was another Google (Nasdaq: GOOG  ) Android partner or Microsoft (Nasdaq: MSFT  ) once Windows 8 hits, someone not named Apple was going to figure out how to gain market share in the tablet space. Even in MP3 players, where the iPod has proved nearly ubiquitous, Apple regularly controlled about 70% market share, leaving 30% for a group of competitors. While Apple will continue being the largest tablet company, Amazon's low-end strategy that focuses on lower margins to push digital sales should ensure that it can continue capturing that lower end, along with a segment of iPad buyers as well.

More rumors to come
If you're expecting an end to the non-stop rumors that attempt to peer into the crystal ball of Apple's future, don't hold your breath. Apple is the largest company in the world, and there's a lot of fame to be won by getting your name out there as the analyst or company "breaking a report" about Apple.

Not only that, but Apple's supply chain is absolutely massive, with a whole army of suppliers feeding the more than $140 billion in products Apple should move this fiscal year. That provides ample "anonymous sources" to fuel reports of Apple's imminent demise.

In the end, your job as an investor is to tune out the noise. Take note of the threat Amazon could cause, but don't get overly focused on short-term rumors from analysts and media members trying to one-up each other. Focus that attention instead on the long-term areas that'll drive Apple, like the news that 21% of Chinese consumers are now planning on buying a Mac computer and that Apple is now the most desirable computer brand in the country. China's now the world's largest PC market, so if you ask me, a piece of news like that says a lot more about Apple's future than does trying to parse short-term movements from "unnamed sources" in the supply chain.

Invest accordingly.

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Eric Bleeker owns shares of Cirrus Logic. You can follow him on Twitter to see all of his technology and market commentary. The Motley Fool owns shares of Google, Microsoft, Cirrus Logic, Apple, and TriQuint Semiconductor. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Amazon.com, and Google, as well as creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2011, at 6:45 PM, gspet wrote:

    All in all you did an insightful job with this article, but I still get very annoyed when I read "Apple missed." Yes, you point out that they missed analyst estimates, but you should have explained that Apple trounced their own estimates. When a company doesn't reach numbers greatly inflated over their own estimates, that shouldn't be defined as a miss. It was the analysts that failed, not Apple.

  • Report this Comment On November 13, 2011, at 7:14 PM, JokerJoey wrote:

    You're correct in your analysis of ignoring the noise. There will be lots of it.

    However, will someone PLEASE stop telling everyone that Apple missed estimates last quarter? Apple BLEW its guidance away. The idiot analysts became OVER-OPTIMISTIC. That's not Apple's fault and this should not be seen as a miss under those circumstances. Yeesh!

  • Report this Comment On November 13, 2011, at 7:15 PM, JokerJoey wrote:

    Oops. Didn't read @gspet up there. I guess we agree. So there are at least three sane minds in the Apple investing world.....

  • Report this Comment On November 13, 2011, at 7:19 PM, demodave wrote:

    "The bottom line in all this: Should investors care?

    The short answer is 'no.' "

    And the long answer is "hell, no". Apple CREATED the consumer tablet market with the iPad, just as it did the MP3 market with the iPod. The tablet market will grow, others will ride Apple's coat-tails, and Apples sales numbers and dollars will continue to grow.

    I am disproportionately invested, but at current valuations, I am certainly not going to sell. It may be a while before that happens. I'm even still tempted to buy.

  • Report this Comment On November 13, 2011, at 9:46 PM, bbrriilliiaanntt wrote:

    Buy aapl on dips like this...period...

  • Report this Comment On November 14, 2011, at 1:29 AM, ConstableOdo wrote:

    Wall Street and analysts are just constantly trying to find major weak spots in Apple for some odd reason. If most of the companies were as successful as Apple in moving products, there'd probably be a lot more jobs available. These media types try to nitpick everything that Apple does or doesn't do or is imagined to do or not do. Anytime there is some supply shortage it's always Apple that's going to suffer the most. Why the hell is that when there are companies that can barely rub two dimes together to buy components upfront from multiple sources? Apple probably get preferential treatment from suppliers due to ordering huge supplies of units.

    Also, calling the Kindle Fire as a major competitor to the iPad is downright insulting.

  • Report this Comment On November 14, 2011, at 8:56 AM, Morgana wrote:

    People are still lining up at Verizon and Apple stores begging for the apple phone and ipads. Some of the analysts need to step away from their cubicles.

  • Report this Comment On November 14, 2011, at 3:28 PM, racchole wrote:

    I think TMF should close comments on any AAPL-related article. For one, I never see the author provide feedback on most, if not all, posts. And that is because a large majority of AAPL shareholders are very "uninformed" investors who wouldn't know black from white if they tried investing in any other industry besides "consumer electronics."

    Every pro-AAPL post falls into one of two categories: 1) defending someone bad-mouthing AAPL with usually no facts to back up their defense; or 2) promoting AAPL's products by declaring them better than the rest, and saying that AAPL must be a good investment because everyone loves Apple products.

    While most, if not all, pro-AAPL investors are correct in their opinions, the majority of them do not even know why they are right, except for the fact that they see thousands of people lining up to buy their products. I just read way too many baseless comments to even think that they are worth having posted on this website.

  • Report this Comment On November 18, 2011, at 6:57 PM, NinjaHamster wrote:

    "Apple could be cutting back because of supply issues resulting from the Thai floods that have devastated large part of the chip industry"

    Yes, most likely. However, it doesn't matter is it is lessened demand or supply issues as far as short term results go.

    "If Amazon does produce 5 million Kindle Fires in 2011 and moves most of the inventory, that might mean up to a million lost iPad sales"

    Why 1 million ? Where did you get THAT figure from (I have my suspicions) ? Apple has most of the Tablet market at the moment. If Amazon sells 5 million tablets, virtually ALL of them will be lost sales for Apple, apart from the (figure pulled from air) 1 million who are a new market due to the Amazon's lower price, and would not have bought a Tablet otherwise. Yet, you say 1 million lost sales to Apple is the WORST case scenario without providing any explanation of this metric whatsoever.

    I am long AAPL, but even so - a little balance and analysis in an article would be nice !

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